Although medical and recreational marijuana is legal in many states across the country, cannabis remains illegal under federal law and the lack of federal regulation forces the industry to operate outside the traditional financial system.
Dispensaries and other cannabis companies without access to federal banks and credit card networks are forced to accept and maintain cash on hand, creating a dangerous situation for workers.
This untenable situation has resulted in more than 80 armed robberies in Washington state alone, some of which ended in death.
Cannabis entrepreneurs are also forced to pay exorbitant bank fees that must be paid at state-licensed institutions.
Is Cryptocurrency A Possible Solution?
Cryptocurrency has long been touted as the solution to the US cannabis industry’s banking problems. According to CoinDesk, the legal cannabis industry’s problems “go much deeper than a lack of access to banking.” The question now is whether cryptocurrency is a possible alternative to the “legacy financial system by accepting crypto payments and storing the money in crypto wallets rather than storing stacks of cash.”
According to a CoinDesk report, “Crypto’s inherent volatility and high transaction costs make it a poor substitute for cash, dissuading many potential cannabis business owners from going through the trouble of setting up a digital wallet and learning how to accept crypto payments.”
In 2018, Coinbase shut down a Washington-based MMJ dispensary’s account, citing federal regulations.
Even if cryptocurrency were the solution, there would be other issues that it could not legally fix, such as high taxes, low-profit margins, and black market competition.
Background: Silk Road, a darknet founded by Ross Ulbricht, introduced the marijuana industry and the cryptocurrency sector. “Before being shut down by the FBI in 2013, the Silk Road allowed people to use bitcoin to buy and sell marijuana, which was at the time criminalized in many states.”
However, there have been changes that normalized both industries since then. CEO Ryan Hunter pointed to the Crypto Cannabis Club, a social club for cannabis consumers, “basically uses NFTs as the membership card,” referring to non-fungible tokens.
Cannabis, Crypto & Social Equity
People’s DAO is a decentralized autonomous cannabis organization that is primarily for BIPOC leaders in the cannabis industry to gain access to capital. Also, there are other organizations that provide NFT services to strengthen their community.
Henry Baskerville, the owner of Colorado-based law firm Fortis Law Partners, told CoinDesk that the Section 280E tax requirements mean cannabis companies pay around a 70% tax rate, compared with the average corporate tax rate of 20%.
“A lot of people get into cannabis thinking that they’ll make money hand over fist, but they aren’t taking into consideration these taxes and smaller profit margins, so they fail,” Baskerville said.
Section 280E, states that businesses selling cannabis, or any other federally illegal controlled substance, cannot deduct any expenses incurred in the production, distribution and sale of that product.
With tight profit margins and cash flow issues, the volatility of cryptocurrencies would also be a risk for cannabis companies.
Marijuana Banking Reform Is Needed
The Secure and Fair Enforcement (SAFE) Banking in Cannabis Act was created to give cannabis businesses in legal-use states what they are lacking today: safe and affordable access to banking services.
The bill, introduced by Colorado Rep. Ed Perlmutter, sets up protections for banks and credit unions so that they can offer loans, capital investment, and other services to cannabis companies in states with legal markets.
In June, the Senate rejected for the sixth time, the bipartisan marijuana banking legislation in the final version of the United States Innovation and Competition Act (a.k.a The America COMPETES Act).
“SAFE won’t clean up all of the industry’s problems, but it would have a significant impact,” Baskerville told CoinDesk. “Some cannabis business owners are paying in the range of $2K a month just for the pleasure of having a bank account.”
How About Blockchain Technology?
Sundie Seefried, CEO and president of Safe Harbor Financial, which has provided cannabis banking services since 2015 and processed more than $14 billion, is excited about the possible implementation of blockchain technology. “Start to finish, I know that’s a legitimate [cannabis] plant right from the get-go if we do this correctly,” Seefried said about the potential of integrating blockchain technology.
“The cannabis industry has a lot of friction, a lot of redundancy, and a lot of authentication. That’s a problem, and through the use of blockchain technology, everything is transparent,” said Ben Bartlett, a member of the city council of Berkeley, California and a crypto lawyer. “With the automated use of smart contracts, it significantly decreases the amount of friction in the cannabis industry.”
Photo: Courtesy Of Pietro Jeng On Unsplash